Pólya-Based Approximation for the ATM-Forward Implied Volatility
International Journal of Financial Engineering, Forthcoming
12 Pages
Posted: 5 Apr 2017
Last revised: 16 Aug 2017
CUNY Baruch College
Baruch College, City University of New York
Baruch College, City University of New York
Date Written: April 3, 2017
Abstract
We introduce a closed form approximation for the implied volatility of ATM-forward options. The relative error of this approximation is uniformly bounded for all option maturities and implied volatilities. The approximation is extremely precise, having relative error less than 10−6 for all options with integrated volatility less than 1.9, such as options with maturity less than three years and implied volatility less than 100%. Moreover, the approximate implied volatilities fall within the implied volatility bid-ask spread for all the liquid options, such as options with volatility less than 200% and maturity less than nine years.
Keywords: Implied Volatility, Black-Scholes Model, ATM-Forward Options
JEL Classification: C60, C63
Suggested Citation:
Suggested Citation
Matic, Ivan and Radoicic, Rados and Stefanica, Dan, Pólya-Based Approximation for the ATM-Forward Implied Volatility (April 3, 2017). International Journal of Financial Engineering, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2945646
